Scottish-born economist - Angus Deaton - recently published his new book - An Immigrant Economist…
Restoring Fiscal Sanity in the United States: A Way Forward. Essentially, the article is a non-article but a sign-up page to access a speech of the same title by David M. Walker, former top public accountant in the US (Comptroller General) which apparently makes him qualified to speak about monetary systems. The speech is full of nonsense but it gave me some insights into what seems to be unfolding in the national capital over there in America. While I was at the airport today I heard some very sensational news – Navy SEALs stake out US building! Perhaps I am the first to blog about this development. Twitter universe – where are you? The article mentioned in the introduction was written by the self-aggrandising and self-styled “analyst” John Mauldin who apparently has “friends” everywhere. He has added another friend to his list recently – one David Walker – the accountant who used to work for the US government but is now on the payroll of Peter G. Peterson and who appears to have lost his grip on reality. I guess that is why Mauldin has befriended him. I last wrote about Mauldin and his newsletter in this blog – Watch out for spam!. My opinion hasn’t changed. Perhaps he is just more fanatical and self-promoting now as he sells his distored hysterical version of mainstream economics – to further his own financial worth. I implore all sound-thinking readers of this blog not to sign up for Mauldin’s newsletter. You will become his “friend”. He is an idiot! To see that, just think about this statement that he makes while imploring you to sign up to read further idiocy from Walker:
If we do not bring the deficit down below the growth rate of nominal GDP, we become Greece. We hit an economic wall and everything collapses. It will be a real and true Depression 2.0. Fixing this is the single most important topic and task of our generation. If we do not, worrying about P/E ratios, moving averages, long-term investments – anything else, in fact – is secondary. Solve this and we can go back to the usual issuesWhat the hell does bringing the deficit down below the growth rate of nominal GDP mean? A deficit is a flow of positive net spending between the government and the non-government sectors and is measured in the unit of currency of the relevant country. The unit of measurement in the US is $. So we might have a deficit of 10 billion US dollars or something. Nominal GDP is the market value of all final goods and services produced in a particular period by a particular nation. It also is measured in the unit of currency of the relevant country (that is, in the case of the US – $US). The growth rate of nominal GDP is calculated over some period and is the percentage change in the market value of all final goods and services produced in a particular period by a particular nation. Its unit of measurement is per cent (%). $ do not equal % – it is a meaningless comparison. Karl Marx wrote in Capital Volume III (Chapter 48. The Trinity Formula that trying to speak of a “”price of labour” is just as irrational as a yellow logarithm”. So I wonder what John Mauldin thinks his advice to his readers is? I don’t think he has a clue what he is talking about here. Further, I have this advice for John. I guess if the US had nicer islands, changed its national language, drank more ouzo, chilled out a bit, then it is possible – only maybe – that the US could pretend to be like Greece. But John here are the facts mate:
- The US issues its own currency ($US) whereas Greece uses a foreign currency (Euro).
- The US can always honour any financial obligations denominated in US dollars, whereas Greece can only honour obligations denominated in Euro if it has enough Euro. That means it has to raise taxes in Euro or borrow. If it exhausts its tax base and borrowers refuse to lend then the Greek government is broke – out of Euros!
- The US government can never run out of US dollars.
I would argue that the most serious threat to the United States is not someone hiding in a cave in Afghanistan or Pakistan but our own fiscal irresponsibilitySo the real terrorists that we need to attack are those in charge of fiscal policy in the US. That is, presumably why the Navy SEALs have now surrounded the US Treasury Building in Washington and are about to attack. He repeated the call in his statement about the summary execution of Osama Bin Laden and added:
That statement was true then and it is even more true now. It’s now time for the President and the Congress to work together and address the fiscal debt bomb that represents a much greater threat to our country’s and families futures.A debt-bomb. That is what those sneaky shadowy figures that come in an out of this building are making it seems. Not only is it a debt bomb but it is a fiscal debt bomb, which without knowing what that is, sounds awfully scary. Anyway, you can read the speech by David M. Walker that Mauldin claims is worth attention – HERE. I wouldn’t actually bother reading it if I was you. It is my job to read things like this. You are all better advised to go to YouTube and find a suitable calming track – like Simmer Down – by the great Wailers and relax! Walker will go away eventually. You can also see a PDF version of Walker’s Fiscal Sanity Roadshow. It is littered with rhetoric and threats of impending doom as the “fiscal clock is ticking” and the dreaded “The Moment of Truth is rapidly approaching” but short on any economic analysis. I suppose that is no surprise given that Walker is an accountant. In a speech of 3,469 words – the word unemployment appears once. There is no mention of poverty, underemployment and no analysis of the external sector. I think the people who listened to this speech would have been bored shi*less. But then Walker was speaking to the “Connecticut Society of CPAs” so maybe it was the high point of their day! The point is that you can rant until the cows come home about the great American tradition of freedom, prudence, etc and make up stuff about how close to the tipping point the US public debt situation is – but unless you explain why the public debt is a problem and embed that explanation in a properly constructed macroeconomics then you are no better than a hot-gospeller on some street corner – you know the type that people cross the road to avoid. Here is some analysis of Walker’s position though. Walker says:
America has gone from the world’s leading creditor nation to the world’s largest debtor nation. We have also become unduly dependent on foreign nations to finance our excess consumption.America’s consumption patterns might be a cause of concern but that mainly relates to private choice. America is apparently a free nation where individuals choose what to buy and when. It is clear that American consumers like to buy imported goods and in doing so enjoy their benefits. They also are providing the “finance” which allows the foreigners to accumulate financial assets denominated in US dollars. Americans get real goods and services, the foreigners gets a bit of paper. All a matter of free choice. I thought Walker extolled the virtues of free markets and free choice. It is true that if the foreigners choose not to continue to accumulate financial assets denominated in US dollars then they will be less willing to ship real goods and services to the US consumers in order to get hold of US dollars. The real terms of trade will then turn against the American consumers and the junk they choose freely to buy of China etc will be offered on less favourable terms. This will reduce demand for those particular imports and provide increased opportunities for other firms/nations to offers output to the US consumers. If these swings in sentiment are rapid then adjustmebnt pain might occur. None of this has anything to do with public debt or fiscal policy. Then Walker says that:
Many of these foreign investors have shunned our long-term debt due to concerns over future interest rates and the longer-term value of the dollar.Evidence? Bond yields are very low so there is plenty of demand for the US Treasury debt from someone. It is irrelevant where that demand comes from. But moreover, it is irrelevant whether there is any demand at all. Should the private bond holders deem public debt to be offereed on unfavourable terms then the US government has two options:
- Stop issuing debt altogether – and watch the bond markets scream as their supply of corporate welfare (in the form of guaranteed, risk-free annuities) dries up and they actually have to do some work to create a low risk pricing benchmark;
- Instruct the Federal Reserve to purchase the debt.
The Fed may be able to hold down interest rates for a period of time; however, they cannot hold them down forever.And why not? Of-course the Federal Reserve can hold down interest rates at whatever level they choose. They set the short-term rate and if they wanted to buy all longer-term public debt they could hold down rates in those maturities as well. But before the Federal Reserve had to step in the private bond markets would be very happy to be buying up the debt. What Walker fails to acknowledge is that the outstanding public debt is just an expression of the private wealth portfolios held in that form. Why is he so against private wealth accumulation – especially when it is in the safest asset there is – a guaranteed public bond? Walker then went on to talk about the new “Sovereign Fiscal Responsibility Index (SFRI)” which he and some economics students at Stanford University have come up with. Please read my blog – Fiscal responsibility index – reductio ad absurdum ad infinitum – for more discussion on this index. I gave fail grades to the students who were involved in this. Sort of a remote assessment that I hope Stanford adopts! Walker claims that the US government should invoke fiscal rules which ith:
… should include specific annual debt/GDP targets with automatic spending cuts and temporary revenue increases in the event the annual target is not met. In my view, a ratio of three parts spending cuts, excluding interest savings, to one part revenue would make sense.What is sensible about that formula? How would it help the US cope with a dramatic private spending collapse such as occurred in 2008? What is the goal of macroeconomic policy? I think the goal is to advance public purpose which includes keeping unemployment low and production growing. When private spending collapses, public spending has to step in to stop the economy faltering. The mindless application of fiscal rules would prevent the government from acting in this way and the swings in real activity (especially downwards) would be magnified. In effect, the application of such fiscal rules means that the automatic stabilisers are prevented from smoothing out the business cycle. Fiscal policy also become pro-cyclical in times of recession – the worst thing that anyone would want to advocate. But when you are an accountant that cannot see beyond numbers and you don’t really understand what is driving those numbers then I guess you lose sight of what the overall context is. The US has endured a massive private sector collapse. Unemployment and underemployment have risen sharply and are now entrenched at destructively high levels. Poverty rates are rising. The rise in the budget deficits, in one sense, reflects that private spending collapse, but in another sense, also reflects the discretionary actions that the US government took to stop that collapse becoming another Great Depression. The discretionary fiscal response was inadequate and remains so still. It was badly targetted and didn’t yield enough jobs. But it saved America from a catastrophe. The application of Walker’s fiscal rules would have hastened that catastrophe. The last thing I will note about Walker’s speech was this section:
First, Congress and the President should reach a compromise agreement on an appropriate level of spending cuts in 2012 … Second, they should agree to re-impose tough statutory budget controls that will force much tougher choices on both the spending and tax side of the ledger beginning no later than 2013. Third, they should authorize and fund a national citizen education and engagement effort to help prepare the American people for the needed actions and to facilitate elected officials taking them without losing their jobs. Fourth, they should create a credible and independent process that will provide for a baseline review of major federal organizational structures, operational practices, policies and programs in order to make a range a transformational recommendations that will make the federal government more future focused, results oriented, successful and sustainable.First, the spending cuts will cause the US economy to slow even further and will increase the budget deficit as a result. The deficit in the UK is rising as they try to hack it down. The reason? Because they do not understand that the budget outcome is a barometer of economic activity and when that collapses the automatic stabilisers cushion the fall – result – the budget deficit rises. The guaranteed way to reduce a budget deficit is to restore private sector growth – and thus private spending. Second, there is something insidious about these ideologues. They preach freedom yet advocate anti-democratic proposals. In the fiscal domain this usually relates to the promotion of “independent processes” to discipline the elected officials. Democracy means at least that the elected officials take responsibility for their decisions. Fiscal policy should not be devolved to “independent” commissions full of unelected and ultimately unaccountable ideologues. Third, Walker takes this anti-democratic sentiment one step further – now he is advocating harsh austerity measures (which he knows will cause more unemployment and rising poverty) but he wants the “elected officials” to be able to impose these harsh austerity measures without the fear of “losing their jobs”. Elected officials can only lose their jobs (improper behaviour aside) if the voters kick them out. That is another essential aspect of democracy. Why aren’t the Tea Party-types screaming about this? Meanwhile across the Atlantic The much-vaunted manufacturing led recovery in Britain, which replaced the consumer-led recovery when that never appeared, has also disappeared. The UK Guardian (May 3, 2011) article – Manufacturing falters as figures show output has fallen to a seven-month low – tells us that David Cameron’s hope that manufacturing would save Britain as his government systematically vandalises the nascent recovery with their austerity campaign have been dashed. See also this article – Manufacturing recovery runs out of steam in April. No real analysis is needed. The facts are clear. Manufacturing output is collapsing again as demand for its output falters. Why is that? Answer: spending is declining because people have less income overall and are becoming increasingly pessimistic Basic rule of macroeconomics – spending equals income which leads to output and employment growth. Cut spending and growth diminishes. Firms need orders to produce and employ. The austerity campaign seemingly convinced voters that the basic rule of macroeconomics was wrong. Instead they invented a new concept – a fiscal contraction expansion. Problem is that the political spin was lies. The Brits are now finding that out the hard way. What will the ideologues hold out as the next great growth hope in the UK given that private spending is contracting, manufacturing is declining and public spending is declining? I guess they will still hold out hope for an export-led recovery. Stay tuned. Conclusion You cannot seemingly reason with ideologues – especially those who have lost their grip on reality. Anyway, I am back home tonight – which is the best place to be! Postscript I promise not to make a theme of this but I thought this headline which appeared in the New York Times (May 4, 2011) was one of those times when you realise how stupid the American government spin doctors are. We were led to believe that there was a fierce “fire fight” in the compound in Pakistan which invoked images of OBL with some serious weapons hiding behind barricades giving it to the brave Navy SEALs. All sorts of speculation has been over the Internet with various amateur military experts detailing the type of weapons OBL had (AK47s and all sorts of other alphabetical-numerical options) and what went down. Now we know – he wasn’t even armed. Sounds like an summary execution to me. I guess he resisted with a pillow or something given the time of night that the incident took place. We were also told by the “US officials” that he hid behind his wife, using her as a human shield. Ahh, the dirty coward – what sort of “man” would hide behind his wife – we knew all along what sort he was – etc etc. Now, we know – he didn’t hide behind her at all. She was shot in the leg and he was executed. That is enough for today!]]>